Our continuing interest in this area has been to develop an understanding of the role and mechanism of regulation of the cyclic nucleotides cyclic AMP and cyclic GMP in E. coli. Our emphasis this year has been on the mechanism by which the sugar lactose regulates the activity of adenylate cyclase. In wild-type strains of E. coli, the transport of lactose is correlated with an inhibition of adenylate cyclase activity. The mechanism of this effect is complex, involving regulation by mechanisms involving phosphorylation as well as membrane potential. In some E. coli strains harboring mutant forms of lactose permease, exposure of the cells to lactose produces a stimulation of adenylate cyclase. These findings suggest an additional level of complexity of regulation of adenylate cyclase activity.